While sitting on your beach chair in the hot sun with an order of boardwalk fries, you may think that now is the perfect time to buy that vacation home you have always dreamed of. However, before you buy, it is a good idea to know what impact that new purchase may have on your personal tax return.
Personal Use Only: If you only use your new vacation home for personal use, you are in luck because the tax treatment for this is very simple, and it is treated much like your personal residence.
- Real Estate Taxes – Deductible on Schedule A of your personal return
- Qualified Residential Mortgage Interest – Deductible on Schedule A of your personal return
- Operating Expenses (Utilities, repairs, etc.) – Not deductible on your personal return
Mostly Personal Use but rented for fewer than 15 days: If you rent your vacation home for less than 15 days a year, the IRS allows you to treat it as though you never rented your home at all. The expenses are treated just like personal use only, but the income received from those rented days is TAX FREE!
Personal Use and rented more than 14 days: This is probably the most complicated scenario because you have to treat the property as both a rental and as a personal residence. The first thing we have to talk about are fair rental days. You need to figure out how many days the vacation home was rented and how many days it was used for personal use. Any days that you spend primarily on repairs and maintenance do not count as personal use days.
Once you have the total fair rental days for the year, you have to allocate your expenses between the personal use and the rental use days. The personal use share of those expense are treated just like the personal use only. The rental share of income and expenses are picked up on your personal return’s Schedule E (supplemental income and loss from real estate):
- Rental Income – all should be reported on Schedule E
- Real Estate Taxes – Prorated percentage reported on Schedule E
- Mortgage Interest – Prorated percentage reported on Schedule E
- Operating Expenses (Utilities, repairs, etc.) – Prorated percentage reported on Schedule E
Rented Only: If you only rent your vacation home and NEVER use it for personal use, outside of repairs, than it’s treated as any other rental property that you would own. All income and expenses are reported on Schedule E.
If you find yourself in a situation where you have the opportunity to buy a vacation home and have questions regarding the tax treatment, or want to discuss the tax benefits and downfalls to renting it out, please do not hesitate to reach out and contact us.